On The Limitations Of Financial Analysis Indicators

Financial analysis is an important way to evaluate the operation of an enterprise.

Starting from the commonly used financial analysis indicators, this paper analyzes the limitations of commonly used financial analysis indicators from three aspects: debt paying ability, operating capacity and profitability, and makes a principled reminder of the improvement and perfection of financial analysis indicators.

Analysis of solvency, financial indicators, solvency analysis, including short-term solvency analysis and long-term solvency analysis.

Short term solvency is a guarantee for enterprises to repay current liabilities in full and in time. The main indicators include liquidity ratio, quick ratio and interest protection multiple.

The higher the ratio, the stronger the short-term debt paying ability of enterprises, but these ratios also have certain limitations in evaluating short-term debt paying ability.

1. index of liquidity ratio.

Liquidity ratio is used to reflect the ability of current assets to repay current liabilities.

It can not be used as an absolute standard to measure the short-term liquidity of enterprises.

The first is that the enterprises have a strong guarantee of the current assets to repay their short-term debts, which does not mean that the enterprises have enough debt paying funds.

Therefore, when examining the liquidity ratio, we should consider the short-term liquidity of each current asset, design a realizable coefficient, and amend the current assets of the enterprises, so as to get an objective and real liquidity ratio.

The two is the inconsistency of the valuation basis, which weakens the reliability of the short-term debt paying ability to a certain extent.

When calculating the current ratio, the short-term liabilities in the denominator are mostly calculated at the maturity value, while some of the current assets in the molecule are priced at present value (such as cash and bank deposits), some are based on historical cost (such as inventory and short-term investments), and others adopt future valuation (such as accounts receivable).

The inconsistent basis of valuation will inevitably lead to a decrease in the reliability of short-term debt paying ability.

Therefore, the ratio between the future value of the liquid assets and the future value of short-term liabilities can better reflect the short-term debt paying ability of the enterprises.

The three is that the ratio reflects only the static state of the reporting date and has a strong whitewash effect. Therefore, we should pay attention to the change of the current assets and current liabilities before and after the accounting analysis period.

The proportion of each factor in the current assets has an important impact on the debt paying ability of the enterprises. The larger the proportion of the less liquid projects, the worse the debt repayment ability of the enterprises will be.

Enterprises can whitewash their current ratios by manipulating their liquidity or reducing their current liabilities, so that they can manipulate their size to mislead information users.

2. speed ratio index.

Quick ratio is a better indicator of the safety and stability of current liabilities than current ratio.

Although the ratio has made up for some shortcomings of the current ratio, the composition of quick assets has not been fully considered.

Although quick assets are strong in liquidity, they are not equal to the current payment capacity of enterprises.

When there is a large number of bad accounts receivable in the quick assets of enterprises, or when the short-term stock investment of enterprises is locked up and converted into real long-term investments, even if the ratio is greater than 1, it can not guarantee that enterprises have strong short-term solvency.

Therefore, this ratio should be combined with relevant indicators such as quick assets liquidity, accounts receivable turnover and bad debt reserve ratio.

3. interest protection multiple index.

The interest guarantee ratio reflects the guarantee degree of profitability to debt repayment.

This ratio can only reflect the ability of the enterprise to pay interest and the basic conditions of the enterprise's debt operation, and can not reflect the repayment ability of the enterprise's debt principal.

At the same time, the principal and interest of the enterprise repay the loan is not paid by profit, but is paid by the current assets. Therefore, when using this ratio, it can not explain whether the enterprise has enough liquidity to repay the principal and interest of the debt.

In addition, we should pay attention to the non cash cost when using this index.

In the long run, enterprises must have the funds to pay all their expenses, but in the short term, the fixed assets depreciation expenses, the prepaid expenses, the deferred assets amortization, the intangible assets amortization and other non cash payment fees do not need to be paid in cash, but only from the current profits of the enterprises.

Therefore, some enterprises can repay their debt interest even when the interest guarantee ratio is less than 1.

Two, operating capacity financial indicators analysis 1. accounts receivable turnover index.

The accounts receivable turnover rate is used to reflect the turnover rate of accounts receivable.

It has the following limitations in practice: first, it does not consider the recovery time of accounts receivable; it can not accurately reflect the progress and equilibrium of annual accounts receivable; two, when sales are seasonally, especially when the difference between credit sales volume varies from year to year, the index can not continuously reflect the recovery of accounts receivable across the years. Three, it is impossible to provide timely information on receivables turnover.

The index reflects the turnover of a certain period of time. It can only be calculated at the end of the year on the basis of annual sales and the average occupancy of accounts receivable.

2. index of inventory turnover.

Inventory turnover is an indicator that reflects the strength of the enterprise's sales ability, whether the inventory is excessive and whether the assets have strong liquidity. It is also a comprehensive index to measure the efficiency of inventory operation in all links of production and operation.

In practice, the inventory valuation method has a greater impact on the inventory turnover rate. Therefore, when analyzing the inventory turnover rate of enterprises in different periods or different enterprises, we should pay attention to the consistency of inventory valuation methods.

In addition, in order to improve the rate of return on assets, business management may want to reduce inventory level and turnover period, sometimes influenced by human factors, which can not accurately reflect the operational efficiency of inventory assets.

At the same time, some related costs caused by excessive or low inventory level should not be neglected in the analysis. For example, low inventory level will lead to loss of customer reputation, sales opportunities and delayed production.

It is worth noting that high inventory levels and low inventory turnover do not necessarily indicate low efficiency in asset utilization.

The increase in inventories may be the result of a business strategy, such as prudent behavior due to shortages that may cause future supply disruptions, speculative actions to predict future price increases, and actions to meet the anticipated increase in demand for commodities.

In addition, for many enterprises that implement inventory control (such as just in time JIT) and zero inventories, the ratio will be meaningless.

Three, profitability, financial indicators 1. sales profit margin indicators.

The main analysis index of profitability analysis is sales profit margin index.

The sales profit rate is the ratio between the total profit of a certain period of time and the net sales of products, which reflects the profitability of enterprises in a certain period.

Although sales profit rate can reveal the profit level of a specific period, it is difficult to reflect the stability and permanence of profit, and this ratio is affected by the financing decision of enterprises.

The financial cost, as the cost of financing, must be deducted when calculating the total profit.

With the same factors as sales revenue and selling cost, the financial cost level will be different due to the different capital structure, and the profit margin of sales will be different.

At the same time, the net profit of investment is the profit gained from mutual participation, holding or other forms of investment among enterprises, and there is no matching relationship between the net profit and the sales revenue of current products in the sales profit rate.

Similarly, there is no matching relationship between sales profit margin indicators and net operating expenses and sales revenue of current products.

Therefore, the sales profit rate index does not conform to the matching principle and comparability principle.

It is also important to note that with the diversification of business practices, it will be difficult to distinguish between main business and other businesses.

In actual operation, some enterprises' extra business income even exceeds the main business income.

If the index of sales profit is calculated by the main business income, it can not reflect the overall picture of the business income, nor can it reflect the profit level of the enterprise correctly.

2. index of capital maintenance and appreciation.

The rate of capital maintenance and increment is an index to assess the ability of operators to maintain and increase the value of capital invested by investors.

The two is the data on the two denominator of the two denominator and the lack of temporal correlation. If we take into account the time value of money, we should plate the net assets at the beginning of the year into the value at the end of the year (or the value at the end of the year net value at the end of the year), then compare it with the net assets at the end of the year (or the beginning of the year); and the three is that the increase in paid capital and capital reserves caused by the objective reasons of the capital invested by investors, the enterprises accepting donations, the capital (equity) premium and the appreciation of assets is not a capital appreciation, and the current profits allocated to investors are not included in the "undistributed profit" project at the end of the balance sheet. There are the following deficiencies in the capital maintenance and appreciation rate: first, the index is not only influenced by the results of business operation, but also influenced by the profit distribution policy of enterprises, while the effects of price changes are not considered.

Therefore, when calculating the rate of capital maintenance and increment, we should deduct the increase and decrease in the reporting period due to objective reasons, plus the profit allocated to investors.

Capital appreciation is the difference between the net assets at the beginning and end of the operation that the operators use the stock assets to carry out various business activities.

3. index of net assets yield.

The rate of return on the net assets reflects the rate of return of the company's shareholders to the company and reflects the value added of the company's net assets.

There are two main problems in the net assets yield index: first, because the amount of cash dividends paid to shareholders has been eliminated in the "year-end net assets" project, the calculation caliber of the net asset yield of different dividend policies is different; two, the net assets added in the company year are included in the "year-end net assets" project, and this part of the increased net assets is gradually acquired in the reporting year, and after the company's use of the new net assets is naturally acquired, the above calculation formula obviously does not take into account the use time of this part of the net assets, resulting in the calculation result of the net assets yield rate is not reasonable.

Many scholars and practitioners have tried and discussed the work of correcting and improving financial analysis indicators.

Improving and perfecting the current financial index system is of great significance for improving the quality of accounting information, deepening the reform of accounting system and standardizing accounting work.